If there's one component of the fiscal cliff that should have stock market investors freaked out, it's the risk of higher dividend and capital gains taxes. If nothing is done by the end of the year, Bush-era tax cuts will expire causing the dividend income tax to surge from 15 percent to 43.4 percent. This is bad news for investors who bought dividend paying stocks for that cheap income.

One way that companies can make their shareholders happier is to dump some cash on their laps via a "special dividend" before the dividend tax goes up. "With the rates set to rise we see increased potential for liquidity events ahead of the change," wrote Goldman Sachs' Robert Boroujerdi in a September note to clients. Since the crisis, corporations have become cash rich. But with the global recovery anemic, corporate investment opportunities have been limited. And because cash offers little return these days, one of the more prudent actions for companies has been to buy back stock or offer dividends.

Source: Business Insider

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1 comments

  1. dizzy7 // December 2, 2012 at 11:06 AM

    The tax rate on dividends is NOT due to go up to 43.4%. The MARGINAL tax rate on income in excess of $398,350 is what will go up to 43.4% if the Bush tax cuts expire. Unless all of your reader's (except me) are among the super-rich with incomes above $398,350, they will pay a higher tax rate on dividends but none of their earned income/dividends/capital gains will be taxed at 43.4%.

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